C L A I M D E N I E D July 2004 A publication of the Lowenstein - PDF document

C L A I M D E N I E D July 2004 A publication of the Lowenstein Sandler Insurance Law Practice Group Broad Coverage For Construction Defects By Alexander J. Anglim, Esq. he Wisconsin Supreme Court American Girl, Inc. , 673 N.W .2d 65 doctrine.” “The economic loss T recently issued a decision that (Wis. 2004) arose from the doctrine generally precludes analyzes several recurring construction of a warehouse. The recovery in tort for economic losses construction defects insurance insured, the general contractor, relied resulting from the failure of a issues, including (i) whether such upon the site-preparation advice of product to live up to contractual claims constitute an “occurrence;” an engineering subcontractor. Id . at expectations.” Id . at 75 (internal (ii) whether such claims are for 69. The advice was faulty, and soon citation omitted). The insurer “property damage” and (iii) after construction the building began argued that since the building application of the various “business to sink. Id . at 69-70. As a result, the owner could not recover in tort risk exclusions.” The court also structure buckled and cracked, and from the policyholder, there was no applied a continuous trigger ultimately was declared unsafe and ‘property damage.’ The court (without any real analysis). Finally, torn down. Id . rejected this argument, holding that the case is notable for its holding “the economic loss doctrine is a Property Damage regarding the professional services remedies principle . . . [i]t does not The court found that the “threshold exclusion. determine whether an insurance question” was whether the claim policy covers a claim, which The factual situation in American involved ‘property damage’ caused by depends upon the policy language.” Family Mutual Insurance Company v. an ‘occurrence’ as those terms were Here, the policy provides that defined in the standard-form CGL Inside “physical injury to tangible policies. The court ruled in the property,” regardless of the cause of NOTICE: policyholder’s favor. GOOD NEWS, BAD NEWS action that the injured party — alleges, constitutes ‘property The insurer contended that the D&O SCORECARD damage.’ Thus, since the “sinking, — claim involved solely economic loss, buckling, and cracking of the BROKER - CLIENT rather than property damage, CONFLICTS warehouse was plainly ‘physical relying on the “economic loss This document is published by Lowenstein Sandler PC to keep clients informed about current issues. It is intended to provide general information only. A L D

injury,’” the court concluded that assumption of liability in a contract it does not apply if the “damaged the claim involved ‘property or agreement.” American Family work or the work out of which the damage’ as defined in the policy. Id . argued that this exclusion applied damage arises” was performed by a because the owner’s claims against subcontractor. In this case, the Occurrence the policyholder were grounded court found that the damage arose American Family also argued that out of the improper site preparation since the owner’s claim was As with most post-1986 advice given by the soil engineer, grounded in breach of contract CGL policies, however, who was a subcontractor. The court rather than tort, there was no the exclusion contains an distinguished the cases cited by ‘occurrence,’ “because the CGL is exception — it does not American Family, on the grounds not intended to cover contract apply if the “damaged that they involved interpretation of claims arising out of the insured’s work or the work out pre-1986 policy forms that did not defective work or product.” Id . at 76. of which the damage include the subcontractor The court firmly rejected this arises” was performed by exception. Accordingly, the court argument. Although breach of a subcontractor. found that the exclusion did not contract claims generally are not preclude coverage for the claims at covered under CGL policies, the upon contractual rather than tort- issue here. court noted this is due to the based theories of recovery. However, Professional Services Exclusion inclusion within CGL policies “of the the court rejected the notion that the . . . business risk exclusions, not exclusion operated to bar coverage In addition to the primary CGL because a loss actionable only in for all breach of contract claims. policy, the insurer also issued several contract can never be the result of an Rather, the court found that the use excess policies to the insured. Unlike ‘occurrence’” as defined in the policy. of the word “assumed” was the primary policy, the excess policies Id . In order to meet the policy’s significant, and held that exclusion contained a broad professional definition of an occurrence, all that is only applied “where the insured has services exclusion. American Family required is that the damage be contractually assumed the liability of argued that the exclusion barred accidental, rather than intentional or a third party, as in an indemnification coverage for the claim because the anticipated. Id . at 70. In the present or hold harmless agreement[.]” Id . at damage arose from faulty advice by case, the court found that the 80-81 (emphasis supplied). the soil engineer hired by the unexpected settling and cracking of insured. Business Risk Exclusions the building constituted an The court also rejected American The policyholder relied on Leverence occurrence within the meaning of Family’s arguments regarding v. United States Fidelity and Guaranty , the policy. Id . applicability of the various business 462 N.W .2d 218 (Wis. Ct. App. Contractual Liability Exclusion risk exclusions. Most of the court’s 1990), for the principle that the Notably, the court addressed the discussion focused on the “damage to professional service exclusion does “contractual liability exclusion” in your work” exclusion, which not apply if the “primary objective” of some detail. That exclusion precludes coverage for damage to the the insured’s operations is to provide precludes coverage for the insured’s insured’s own work. As with most a building, rather than a professional liability for damages that the insured post-1986 CGL policies, however, the service. In Leverence , occupants of is obligated to pay “by reason of the exclusion contains an exception — prefabricated homes brought suit